horticulture australia ltd - accc
TRANSCRIPT
Horticulture Australia Ltd
Public Submission to ACCC Grocery Inquiry by Horticulture Australia Ltd on 11th March 2008
Submission No. 2
prepared by
CDI PINNACLE MANAGEMENT PTY LTD
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DISCLAIMER
This report has been prepared for Horticulture Australia Ltd, pursuant to a Consultancy Agreement between
CDI Pinnacle Management and the Horticulture Australia Ltd.
This report has been prepared from data and information gathered from various sources and from primary
research carried out by CDI Pinnacle Management. CDI Pinnacle Management has used its best endeavours and
exercised the best of its skill and ability to ensure accuracy of the data, information and research materials.
CDI Pinnacle Management believes the various sources to be reliable. However, CDI Pinnacle Management does
not warrant the accuracy of any of the data or information provided by third parties or of research materials not
created by CDI Pinnacle Management.
CDI Pinnacle Management accepts no responsibility for any error contained in or any omission from the report
arising from the data or information provided by third parties or from the research materials not created by
CDI Pinnacle Management.
This report is for the use only of the Horticulture Australia Ltd for the express purpose of providing a submission to
the ACCC Inquiry into The Competitiveness of Retail Prices for Standard Groceries. CDI Pinnacle Management
accepts no responsibility whatsoever to any third party in respect of the whole or part of this report (including all
appendices) or its use.
© CDI Pinnacle Management Pty Ltd 2006.
All rights reserved.
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CDI PINNACLE MANAGEMENT
CDI Pinnacle Management (www.pinnaclemanagement.com.au) is an international consultancy specialising in the
food and agribusiness sectors. We have been advising and assisting firms in food and agribusiness since 1989.
Our core capabilities are in chain management, innovation, the development of new business opportunities and
the application of new technologies, and assisting the re-engineering of industries and regions, across food and
agriculture sectors.
Our clients are innovators, early adopters and industry leaders and agencies. They are corporations in the food
and agribusiness industry, small to medium enterprises (SMEs), Individual Producer/marketers (and Grower-
Packer-Marketers), producer groups, development and Government agencies, and marketers and Processors.
CDI Pinnacle Management takes a non-traditional, interactive approach to consultancy. Using a step-by-step
process, we assist businesses and agencies in developing and implementing progressive and tailor-made
solutions. We assist firms, industries and regions to develop and implement a global vision and provide the tools
and assistance to achieve success in domestic and international arenas.
Contact: Shane Comiskey
Unit 16 / 43 Lang Parade,
Milton QLD 4064 Australia
Tel: +61.7.3217 6466
Email: [email protected]
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TABLE OF CONTENTS
1. EXECUTIVE SUMMARY ..................................................................................................... 5
1.1 HAL Position on Inquiry ............................................................................... 5
1.2 Australian Horticultural Supply Chain ....................................................... 6
1.3 Cost of Production in Horticultural Crops ................................................. 8
1.4 Alternative Channels to Market for Produce ............................................. 9
1.5 Doing Business with MSC and Others ..................................................... 11
1.6 Grower Professionalism ............................................................................ 12
2. MAJOR GROWER COST CENTRES ............................................................................... 14
2.1 Labour .......................................................................................................... 14
2.2 Fuel & Oil ..................................................................................................... 15
2.3 Packaging .................................................................................................... 18
2.4 Fertiliser ...................................................................................................... 18
2.5 Crop Protection Chemicals ....................................................................... 22
2.5.1 Prices for Crop Protection Chemicals ........................................................................ 22 2.5.2 Rural Merchandisers........................................................................................................ 23
2.6 Water & Irrigation ....................................................................................... 23
3. FRUIT & VEGETABLE COP ANALYSIS .......................................................................... 27
3.1 Leafy Vegetables – Eastern Australia (1) ................................................. 27
3.2 Leafy Vegetables – Eastern Australia (2) ................................................. 29
3.3 Strawberries and Mangoes – Eastern Australia ...................................... 31
3.4 Tropical Fruit – Eastern Australia ............................................................. 33
3.5 Macadamia Nuts – Eastern Australia ....................................................... 35
3.6 Citrus Industry – South-Eastern Australia ............................................... 38
3.7 Bananas– Northern Queensland (1) ......................................................... 39
3.8 Bananas– Northern Queensland (2) ......................................................... 41
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3.9 Pineapples– South-Eastern Queensland ................................................. 43
4. GROWER VIEWS ON ALTERNATIVE MARKETING CHANNELS ................................. 45
4.1 Factors Influencing Grower Choice of Marketing Chan nel .................... 45
4.2 Doing Business with MSC ......................................................................... 46
4.2.1 Increased Costs of Business with a MSC ................................................................. 46 4.2.2 RPC’s and One-Touch Packaging .............................................................................. 47
4.3 Chain Transparency Between Growers & Other Chains P articipants .. 48
5. ADDITIONAL INFORMATION TO SUBMISSION ONE .................................................... 51
5.1 ‘Combined Marketing’ and Horticultural Code ........................................ 51
5.2 Equivalence of Horticultural Product ....................................................... 51
BIBLIOGRAPHY ..................................................................................................................... 53
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1. Executive Summary
1.1 HAL Position on Inquiry
This submission made by Horticulture Australia Limited (HAL) is the second one made to the ACCC Inquiry into
the Competitiveness of Retail Prices for Standard Groceries.
Therefore this submission should be read in conjunction with the first submission of the 13th March, 2008.
The purpose of this second submission is to provide additional information which we believe to be relevant to the
Inquiry, particularly focussed around the factors that are influencing the costs of production of fruits and
vegetables in Australia. Further, we wish to present additional information provided by horticultural producers and
other research previously conducted into issues pertaining to how the production sector ‘do business’ with the
remainder of the horticultural supply chain.
In the first submission our central recommendation was:
As has been…..discussed in detail throughout this submission, the time available to undertake
the research that supports this submission was not adequate to investigate this complex supply
chain, the costs, prices and margins being experienced at each level in the chain, and the issues
of most concern to the fruit and vegetable Growers and other chain participants.
HAL’s suggested approach is that an independent party be commissioned by the ACCC to
conduct the investigation with its Terms of Reference agreed to by a Steering Committee of
parties which the ACCC decide should be invited. The Inquiry should focus around a basket of
horticultural products which exhibit a variation of characteristics (staple, non-staple, perishable,
non-perishable, imported, exotic for example). HAL believes the results of the analysis should
be made publicly available although the identity of contributing parties should be subject to
confidentiality.
One of the principle propositions of HAL in its inputs to this Inquiry is that it is the collection and use of objectively
collected information, right across the chain from Growers to End Users, that will enable the Inquiry and ultimately
consumers and participants to feel confident that the outcomes are an accurate reflection of the facts. HAL’s core
recommendation is that such a process be undertaken.
The time available for the preparation of this second submission has not allowed for this original recommendation
to be addressed. As a consequence HAL continues to assert that this recommendation should be pursued.
The core elements of HAL’s second submission are:
1. To provide the ACCC with Costs of Production (COP) information pertaining to the production of a
narrow range of horticultural crops and changes that have occurred over time.
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2. To provide the ACCC with a description of the major factors that have or are influencing the COP of
horticultural producers and the ability of Growers to ‘pass on’ or otherwise COP increases.
3. To provide the ACCC with a description of recent issues that Growers have had in ‘doing business’ with
MSC and the Mid-Chain participants.
1.2 Australian Horticultural Supply Chain
By way of background, Figure 1 diagrammatically represents the Australian horticultural supply chain and its
participants.
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Figure 1: Current Australian Horticultural Supply Chain Structure
Source: CDI Pinnacle Management, 2008.
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1.3 Cost of Production in Horticultural Crops
In the time available to complete this submission initial information has been gathered specifically about key cost
centres for horticultural production enterprises and also a small number of initial case studies have been collated,
reflective of common Grower enterprises.
The key conclusions that this information either suggests or poses some basis for (until adequate time enables a
more complete analysis to be completed) include:
1. Grower business case studies suggest that increasing costs in key inputs, in particular labour, transport,
irrigation water (if temporary water is required to be purchased), fertilisers and chemicals have occurred
between 2005 and 2007 and in some instances well before this.
2. In respect of labour costs the increase in costs are greater than any reflection in award rates. The
shortage of labour, the need to compete for labour with other industries (e.g. mining and construction)
and the need to shift to contract suppliers of labour (labour hire firms) to source labour in a tight market
are key drivers of this. Evidence exists that labour shortages have resulted in crop losses through lack
of harvesting personnel.
3. Information supplied by input supply industries suggests that with the global changes to the dynamics of
supply and demand for fertilisers and chemicals, these costs can be expected to even increase further in
the next to five years. This fact and its impact can be comprehensively addressed in a more detailed
analysis as proposed by HAL herein.
4. Fuel price increases to Growers and transport operators continue to be a significant contributor to cost
increases. By far the greatest impact is on the cost of freight paid by Growers which has increased
around 35 per cent over the last five years and most notably within the last two years. Diesel rebates
have remained the same for over five years.
5. Increased water costs are particularly notable where growers have to access water by purchasing
temporary water. In some regions (e.g. lower Murray Darling basin) this has future potential to make
water too costly for many smaller Growers, leaving corporates and MIS operators the main growers
capable of funding in-season temporary water costs.
6. The lack of water needed to plant a full complement of annual crops (principally fresh and processing
vegetables, tomatoes etc.) alone is a key cost impost to these growers. If a usual area of crop cannot
be planted due to water limitations the overhead costs for every unit of actual production is increased.
Conversely, Growers are faced with increased risks associated with significant investments in temporary
water, because if rainfall events occur, as they did in the Murray Darling in 2007, the potential strategic
market advantage they may have from having produced a crop may have been lost.
7. The Grower case studies, a limited number of which have been able to be collated, also show the
extreme variability in the profitability of grower enterprises.
8. Certain case study examples also demonstrate that in 2007 some Growers achieved good returns for
produce. This is reflective of the overall impact of the drought in many of the major production regions in
Australia. Anecdotal evidence beyond the survey results indicates that some Growers were still in a
position to be profitable in 2007 even with ‘half a crop’. That said, there are also plenty of examples
where Growers have not been able to produce annual crops or have produced poorer than normal
quality perennial crops due to the lack of water
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This submission was not able to fully determine the impacts of the drought on fruit and vegetable prices
paid to Growers in 2007 (and to a lesser extent in 2006) and would be a key focus if the key
recommendation of HAL’S is progressed by the ACCC. We must not also ignore the impact on supply,
prices and returns (both highs and lows) for bananas and other tropical fruits in North Queensland.
HAL’s belief is (in the absence of supporting data) is that the impacts of drought (and cyclones) have been
a significant, but not necessarily the sole factor / contributor to the increased prices being paid by
consumers for fruit and vegetables. Only a more detailed analysis in a reasonable timeframe will be able
to test this belief.
1.4 Alternative Channels to Market for Produce
In its first submission HAL outlined the complexity of the many paths / channels for fruit sand vegetables to move
from Grower to Consumer. Feedback from Growers and others about the strengths and weaknesses, concerns
and dynamics were also briefly covered.
The Grower case studies herein show a significant range of strategies used by Growers in the marketing of their
produce. The channels used and their relative importance are presented in Table 1.
Table 1: Market Channels Used by Growers in the Australian Fruit & Vegetable Industry.
Volume Distributed via Channel in 2007
Grower Case Study Direct to
MSC
MSC via
Consolidator
Wholesaler Export
Market
Processors
Direct
Case Study (1) (Leafy Vegetables) - 60% 15% - 25%
Case Study (2) (Leafy Vegetables) - - 90% - 10%
Case Study (3) (Strawberries) 82% - 11% 1% 6%
Case Study (3) (Mangoes) 40% - 47% 11% 3%
Case Study (4) (Tropical Fruit) - 28% 52% - 20%
Case Study (5) (Macadamia Nuts) - - - - 100%
Case Study (6) (Citrus) N/a N/a N/a N/a N/a
Case Study (7) (Bananas) 80% - 20% - -
Case Study (8) (Bananas) - - 100% - -
Case Study (9) (Pineapples) 72% - 14% 1% 13%
Source: Grower Survey Data, CDI Pinnacle Management.
The diversity in market channels selected reflected in this small sample of growers is indicative of the horticultural
industry. The vast differences between Growers and how they choose to do business is a fundamental factor
behind the ongoing need for various channels to be available to receive produce. This information provided in
Table 1 also highlights another critical fact about the fruit and vegetable industry. Growers are only able to sell a
portion of their produce to the highest priced market due to its characteristics (size, colour, appearance, variety
etc). Different market segments require different quality products. The opportunity to use multiple channels to
market is therefore essential and is a core factor in the viability of the great majority of Growers.
A comment by some Growers and Wholesalers is that MSC take the pick / cream of the crops that are on offer.
Opponents to this view firstly dispute it is as fact for the vast majority of product lines. Secondly, the contention is
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that if buyers (Independent Supermarkets and Greengrocers) wish to purchase this product they should simply
outbid MSC for access to it.
Some of the key comments / take-home messages from the case studies is presented in Table 2.
Table 2: Key Comments Made by Growers Who Completed Case Studies.
Grower Case Study Key Comments
Case Study (1) (Leafy
Vegetables)
� Highest prices achieved in 2007 were via consolidator to a MSC.
� In seasons of over supply prices in the Central Markets were lower and in
seasons of short supply the Central Markets appear to pay the highest
prices.
� The need for additional working capital (+25 per cent) due to increased
COP between 2005 and 2007.
Case Study (2) (Leafy
Vegetables)
� Labour, Packaging, Transport and Repairs and Maintenance represented
77 per cent of total costs in 2007.
� An increase of 40 per cent in sales revenue from 2005 was primarily due to
drought and its impact on total supplies to the market. This example
demonstrates the potential scale of impact that climatic variability can
provide.
Case Study (3) (Strawberries) � Labour in 2007 represented 48.8 per cent of COP.
� Costs increased 69 cents per kilogram from 2005 to 2007.
� Sales returns were 2 cents per kilogram less than the increase in COP.
� 82 per cent of this Growers production is sold direct to MSC.
Case Study (3) (Mangoes) � Labour in 2007 represented 40.2 per cent of COP.
� The Growers supplies relatively equal volumes of product direct to MSC
and to Wholesalers.
Case Study (4) (Tropical Fruit) � In 2007 Labour, Packaging and Transport accounted for 68.5 per cent of
total costs. The percentage increase between 2005 and 2007 were in was
Transport costs.
� Maximises sales through a Consolidator as average returns from this
channel have been far superior price to that achieved through alternative
market channels.
Case Study (5) (Macadamia
Nuts)
� Macadamia growers effectively sell all produce to one of 12 processors
located across the growing region. The only way macadamias growers
can realistically influence the price and return they achieve is by growing
quality and improving yield.
� Labour and fertiliser are the two largest cost items for macadamia growers.
� Growers of a nut product that is in many ways a commodity have little
ability to influence price. The price per kg (NIS) received by macadamia
growers reduced between 2005 and 2007 from $3.65 to $1.60 according to
information provided by the Australian Macadamia Society (website)
Case Study (6) (Citrus) � Labour represents 40.1 per cent of the total COP for the 31 growers
surveyed.
� EBITDA returns were negative for Growers in the lowest 25th percentile of
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the sample group, $335 per ha for the average and still low at $1,238 per
ha for the top 25th percentile. These figures do not take into consideration
the costs of labour for the owner
Case Study (7) (Bananas) � 80 per cent of sales were made direct to MSC by this Grower, up from 50
per cent in 2005.
� The Net Profit before Tax (NPT) was 8.7 per cent, the first positive figure in
four years of production
� Banana Growers costs and returns have been impacted significantly due
to the direct and carry-on effects of Cyclone Larry.
Case Study (8) (Bananas) � This Grower supplies 100 per cent of their bananas to Wholesalers.
� Banana Growers costs and returns have been impacted significantly due
to the direct and carry-on effects of Cyclone Larry.
Case Study (9) (Pineapples) � Labour represents 44.5 per cent of the variable COP.
� EBIT per kilogram is 21 cents per kilogram (16.0 per cent) in 2007.
� The proportion of sales direct to MSC in 2007 were 72 per cent of total
production, up from 54 per cent.
� Average sales returns 31 per cent higher from MSC when compared with
Wholesalers.
Source: Grower Survey Data, CDI Pinnacle Management.
1.5 Doing Business with MSC and Others
The have been a number of areas where input to this submission highlights added costs of doing business with
MSC, either directly or via a Consolidator. They include:
1. Direct impact of MSC driven chain innovations such as Returnable Plastic Crates and One Touch Retail
packaging.
2. Costs and through chain efficiency losses from standardised pallet configurations and the resulting
reduced efficiency in transportation.
3. Additional impacts on transportation costs of the applying the MSC logistical requirements.
4. Costs associated with product being rejected by the MSC and then being redirected through central
market systems in packaging and pallet configurations that clearly identify it as having been rejected by
an MSC, in indeed repacking is not an additional requirements in the case of MSC-specific packaging.
5. Costs associated with complying with MSC quality assurance requirements which are not uniform or
consistent which is surprising given the identical risk profile of all products.
There is further discussion herein about the benefits that flow from the operating models and chain innovations
applied by MSC. Grower suggests however that much of the benefits do not flow to the Growers, Packers,
Wholesalers, Consolidators and others that have the costs imposed on them. It is suggested that the MSC
actively push costs back down the chain to growers and others.
Despite this there is a generally strong, positive view held by many Growers and Consolidators who supply MSC
regarding the nature of the relationship between themselves and the MSC. Growers and Consolidators within the
MSC loop believe that the best returns are achieved from the direct channel to MSC.
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Table 30 herein provides summary comments about impacts on growers of key differences in transparency, price
setting mechanisms, ability to pass costs from Growers into the chain, and Grower awareness of customer
requirements. This information, which deserves further attention in a more detailed study as has been proposed
by HAL, goes some way to explaining the way various channels operate and the ability of Growers to negotiate
prices and pass genuine cost increases onto the rest of the chain.
It may also be of value to compare these summary comments to the way the supply chains operate for other food
production sectors.
In the meat industry Growers (of cattle, sheep, pigs, and other species) effectively have two choices of how to
distribute their products to the market, being:
� Sell direct to a processor (abattoir operator or consolidator that sources product for an MSC). In this
channel the Grower has transparency and knows the price he is receiving per unit of product delivered
(per kg on-hook); or
� Sell through a sale yard where an agent sells on the grower’s behalf. In this transaction the Grower also
has transparency, he is told how much his product sold for and who the buyer was.
In contrast, the area of the fruit and vegetable supply chain that some Growers and Consolidators have expressed
concerns about is where a Mid-Chain party is involved (predominantly some of the Wholesalers in the central
markets) and where the same level of transparency as that experienced by livestock growers through the saleyard
system is not enjoyed by fruit and vegetable Growers.
None of the parties that provided input to this submission, or the first HAL submission, has expressed doubt
regarding the need for the numerous alternative channels including the Central Market system and the importance
of the role of Wholesalers and other Mid-chain participants. Similarly it is clear from feedback received that many
Growers enjoy mutually beneficial relationships with Wholesalers and Non-Grower Consolidators (many of whom
were originally Wholesalers) and rely heavily on this area of the chain for their viability.
The concerns raised are regarding situations where transparency and balanced use of market knowledge and
power are not applied. The ongoing discussion regarding the success or otherwise of the new horticultural code is
focused on this matter and related matters, e.g. levels of compliance, enforcement and awareness of the new
code. The Horticulture Australia Council (HAC) will we understand provide further detailed commentary in regards
this matter on behalf of Growers.
1.6 Grower Professionalism
In the preparation of submission one, HAL did not acknowledge on behalf of the Grower sector some of the
deficiencies that at least some of its members have. These are discussed below:
1. Lack of a National Benchmarking System: Whilst there are sectoral examples of crop / enterprise
benchmarking, a national benchmarking program does not exist and has not been seen as a high priority
by industry generally, although HAL believes it should be. As a consequence there is no uniform
mechanism by which any others in the supply chain can gain an objective (if average) understanding of
the ‘true’ costs of production of horticultural producers and therefore make accurate assumptions of
whether Growers are receiving market returns that are more , less or equal to their COP. Non-Grower
chain members are therefore presented with a range of information by Growers when they are
questioned in relation to their COP. Non-Grower chain members are then not able to assess the merits
of the claims by the Growers relating to these COP. This situation may promulgate the distrust that
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some other members of the supply chain have with the production sector.
HAL anticipates that if its Key Recommendation is adopted this will go someway to addressing the
issues raised above. HAL further hopes that this may in fact be the precursor to a National
Benchmarking System or at least more industry by industry benchmarking.
2. Growers Not Understanding Their Own Cost of Production (COP). Directly linked to the previous factor
many Growers do not know their own COP and often not in any significant detail. This lack of
understanding has further impacts as financiers and government agencies may have a skewed view
towards assessing the individual and sectoral performance of the industry. This has follow-on effects of
the sector not being ‘supported’ to the levels that it may otherwise have been.
3. National Grade Standards. There is no single common language or understanding applying to the
description and / or specifications of produce that are uniformly adopted by the whole chain.
Representative organisations of Wholesalers indicate that the lack of a common language is one of the
areas that gives rise to disputes between Wholesalers and Growers. Initiatives to address this issue in
the past have not been successful as could have been due in part to the number of crops involved, pre-
existing investment in similar languages by supply chain members and low levels of commitment by all
parties to achieve the end goal. It is hoped that the FreshSpecs initiative of the Australian Chamber will
address this issue for the Wholesale markets sector.
4. Grower Business / Negotiation Skills. It is acknowledged that Growers within the horticultural industry
have, like all industry sectors, varying levels of business skills. There have been a variety of initiatives
pursued by a wide variety of industry, regional and local horticultural organisations that aim to build the
business skill capacity of Growers. Many of these initiatives have had mixed success in part due to
general high age of the production sector who generally have a lower preparedness to undertake
change. As the generational shift progresses it is readily apparent that the next wave of Growers
coming into the industry have greater skills and willingness to adopt innovation and change, as it is
hoped does the rest of the horticultural supply chain.
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2. Major Grower Cost Centres
The major variable cost centres impacting on Growers in horticulture are:
� Labour (No 1 cost centre for all growers).
� Transport
� Packaging
� Fertiliser
� Crop Protection Chemicals
� Water / Irrigation
Costs changes and the factors that influence these changes are discussed in detail in the following sections.
2.1 Labour
In Australia, horticultural workers are covered under a variety of State Awards and / or Federal Awards.
Currently, where a State Award exists (which is all states in Australia except Victoria) the relevant state award
applies to sole traders and partnerships. Constitutional corporations which include ‘Pty Ltd’ and ‘Ltd’ companies
are covered under a Federal Award but under provisions covered by the Notional Agreement Preserving a State
Award (NAPSA). In effect the Federal award mirrors the State award with a few exceptions outlawed under the
previous Federal government.
Both the current State (Queensland) and Federal Awards as they apply to horticultural workers is presented in
Table 3.
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Table 3: Changes and Comparisons Between Federal and State Awards for Casual Workers in
Queensland.
Year Queensland Fruit & Vegetable
Industry Growing Award – State
Employees
Queensland Fruit & Vegetable
Industry Growing Award NAPSA
– Federal Award
2002 $13.27 N/a
2003 $13.79 N/a
2004 $14.37 N/a
2005 $14.90 N/a
2006 $15.49 N/a
2007 $16.28 $16.93
2008 $16.28 $16.93
Source: Growcom
The general practice across Australia is to use the Federal award as the base pay level.
If HAL uses the Queensland award as the basis for wage rate movements for horticultural workers, official award
rates of pay have increased 27.6 per cent since 2002.
Discussions with Growers have however highlighted that the actual rate of pay paid to farm workers has increased
at a greater rate than the award rates of pay. This has occurred because of a shortage of supply of farm workers.
This has largely been driven by growth in demand and hence wage rates paid for workers in the mining and
construction industries. Further, some Growers are reporting decreasing numbers of backpackers and ‘grey
nomads’ working in horticulture as hospitality jobs are more plentiful and grey nomads are less likely to need to
work due to higher retirement incomes.
The impact of each of these factors is that Growers are having to pay higher rates of pay than the award in order
to attract workers. As a consequence the actual increase in hourly rates of pay has been in excess of the 27.6 per
cent stated above, since 2002.
An increasing number of growers are abdicating the responsibility for staff recruitment to external contractors.
These labour contractors have the responsibility to source, train (sometimes) and manage (sometimes) for which
they generally receive a flat fee per hour on top of what is paid to the worker, or a percentage of the flat fee. The
rate paid to labour contractors appear to represent around 5-10 per cent on top of the base rate paid.
2.2 Fuel & Oil
The average retail prices paid for diesel in each of the major capital cities is presented in Figure 2. The prices
paid in each capital city track one another closely. Further, industry sources suggest that the price paid per litre by
farmers roughly approximates that paid by consumers in the major metropolitan centres.
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Figure 2: Average Monthly Capital City Diesel Prices, 1999-2008 (February).
Source: FUELtrac, IPIP
An analysis of the average wholesale price paid for diesel in Melbourne is provided in Table 4. As can be seen in
Figure 2 the prices paid across Australia roughly track one another and so HAL is confident to use the Melbourne
figures as a representation of price movements.
Table 4: Average Wholesale Diesel Prices in Melbourne, 2005 to 2008.
Month 2005 2006 2007 2008
January 102.63 126.62 118.70 141.69
February 105.23 131.57 120.15 139.49
March 115.45 133.73 123.02 n/a
April 119.17 139.61 129.48 n/a
May 114.53 142.20 130.94 n/a
June 118.89 140.53 124.94 n/a
July 122.25 138.21 125.95 n/a
August 121.74 139.03 127.35 n/a
September 129.67 132.26 130.84 n/a
October 128.72 125.27 129.30 n/a
November 120.65 121.58 140.09 n/a
December 118.09 124.51 144.91 n/a
Source: FUELtrac
The above table is represented graphically in Figure 3.
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Figure 3: Monthly IPIP Diesel Prices in Melbourne, January 2005 to February 2008.
Source: FUELtrac
By using February 2008 as the reference point, the percentage increase in prices from February in 2005, 2006
and 2007 to that in 2008 are;
February 2005 to February 2008 32.6%
February 2006 to February 2008 6.0%
February 2007 to February 2008 16.1%
Over this period of time of time the rebate paid to farmers for on-farm diesel fuelled vehicles and other equipment
has remained the same at 38.143 cents per litre. Therefore if we take the diesel fuel rebate into account the net
percentage increases in diesel costs to farmers have in fact been:
February 2005 to February 2008 51.1%
February 2006 to February 2008 8.5%
February 2007 to February 2008 23.6%
The figures above therefore represent the effective price increase paid by farmers for diesel over the periods
identified.
As will be demonstrated in Section 3, fuel and oil costs for on-farm operations generally represent only 1-4 per
cent of total costs. Where the greatest impact of diesel prices is felt is in respect of freight costs of produce from
farm and the hidden (as it is included in the price of inputs) costs of transportation of inputs to the farm.
Transportation companies have not been able to absorb all of the increases in the price of diesel and so these
costs have been passed onto the farmer (and input suppliers). Freight companies over the last five years have
typically increased freight charges in the region of 33-40 per cent inclusive of the additional fuel levy charges.
Diesel fuel levies are currently in the range of 8.5-10.5 per cent.
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Again as will be demonstrated in Section 3 the impact of increases in the price of diesel has been significant and
are expecting to be lasting.
2.3 Packaging
Packaging prices (non-RPC) in horticulture have remained relatively constant over the last three years. The
factors that our research and industry observers believe are the major reasons for this stability in cardboard
packaging prices are:
1. Lower Raw Material Input Prices. Since 2001 the average price of pulp has increased from around
US$500 per tonne to US$720 per tonne. Over that time however the exchange rate (in 2001) has
moved from $0.50 to current rates of around $0.90. Depending on actual prices for pulp, exchange rate
on the day and FOREX management, the actual price paid for pulp in Australia dollars has decreased by
20 per cent in this period.
2. Amcor / Visy Price ‘Management’. The highly publicised Amcor / Visy price ‘management’ investigations
have contributed to both companies adopting a more ‘cautious’ or circumspect approach to carton
pricing.
3. Impacts of RPC. Industry observers also believe that the two major carton companies have sought to
maintain market share of horticultural packaging by keeping carton prices at constant prices, so as not to
provide a price advantage over RPC’s.
Discussions with a number of Growers indicate that carton prices are now entering a pricing increase cycle, with
increases in the range of 4 per cent due to price increases associated with increased costs of energy,
transportation and labour costs. The increase is currently only applicable to Visy.
There are two principal packaging suppliers in Australia, Visy and Amcor, with a smaller third player Carter Holt
Harvey. Growers therefore have limited choice in terms of manufacturers. The horticultural sector, although
comparatively small in terms of total dollar contribution to sales, contributes significant margins to manufacturers.
The recent Amcor / Visy price ‘management’ discussions indicate that these margins may have been kept
artificially high.
2.4 Fertiliser
The three major plant nutrition elements used in horticulture are nitrogen (N), phosphate (P) and potassium (K).
Fertiliser costs represent between 5 and 12 per cent of total variable costs for horticultural producers. The relative
importance to different horticultural crops is discussed in Section 3. All major fertilisers are traded internationally
and are priced in US$. With the appreciation of the Australian dollar against the US dollar over the last five years
(at least) the net impact of the dramatic price increases in N, P and K based fertilisers has to some extent been
lessened to Australian Growers.
Australia is a very small player in world terms in respect of fertiliser usage therefore the major fertiliser companies
in Australia have little or no impact on world prices. Although Australia is a producer in particular of Urea and Di-
Ammonium Phosphate (DAP) pricing to Australian customers is still in world terms.
Combined with the price increases associated with the purchase of N, P and K fertilisers has been a 146 per cent
increase in average freight costs. These figures are presented in Figure 4.
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Figure 4: Percentage Change in World Freight Rates, December 2006 to March 2008.
Source: Confidential
Nitrogen
Since 2003, the US$ price for urea (the primary source of nitrogen used in horticulture) has increased in price from
around $150 per tonne to a January, 2008 price of $389 per tonne (a 159 per cent increase). However, with the
appreciation of the $A against the $US the net increase price reduces to around 86.1 per cent, a still not
inconsequential amount.
The movement of prices for Urea from 2003 to 2008 is presented in Figure 5.
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Figure 5: Urea Price US$ FOB, 2003-2008.
Source: Middle East Granular Urea FOB
The primary factors contributing to the rapid increases in prices for urea (particularly in the last 15 months) are:
1. Increases in raw material costs particularly liquid natural gas (LNG) which has more than doubled in
price over the last five years. Other sources of hydrogen include crude oil and coal.
2. Ammonia, the other principle raw material used in nitrogen fertilisers, whilst widely produced has
production concentration in only a few countries, notably India and China. The ability of these countries
to cope with increased demand through additional capacity is restricted due to the time associated with
developing new plants.
3. Increased areas of land planted to grain due to recent increases in soft commodity pricing including in
particular wheat.
4. Enormous increases in the areas planted to bio-fuel crops.
Phosphate
Virtually all of the phosphate produced in the world is produced from rock phosphate. Three regions currently
mine 77 per cent of the world’s supply, Morocco and Western Sahara, China and the United States.
Australia also has significant production capacity of phosphate although like all world traded commodities it is sold
to the Australian fertiliser companies and re-sellers at world traded prices.
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Figure 6: Di-Ammonium Phosphate Prices per US$ per Tonne, FOB Tampa, 2003 to 2008.
Source: Confidential
The growth in the price of DAP and other phosphate based fertilisers has been nothing short of spectacular. Since
February / March 2007 prices have increased 280 per cent from US$263 to US$1,000 per tonne.
The rapid recent increases in the price of phosphate have been driven by:
� Increased areas of land planted to grain due to recent increases in soft commodity pricing including in
particular wheat;
� Enormous increases in the areas planted to bio-fuel crops;
� The inability of miners and processors to ramp up production at short notice. No new significant
productive capacity in the product of phosphate fertilisers is expected to come on stream for the next
three years; and,
� Higher costs being paid for products used in the manufacture of DAP as they have a range of alternative
uses. These inputs include phosphate rock and sulphur which is used in the production of Single Super
Phosphate (SSP) and also phosphoric acid.
Industry sources suggest that over time (next two years) that the price of phosphate based fertilisers may
moderate as the speculative nature of the market hopefully commences to slow down.
Phosphate prices are not however expected to go back to levels of say five years ago unless there are significant
new minable resources identified.
Potassium
Only five countries in the world mine potassium salt which is then used in the production of potassium fertilisers.
These are Canada, Russia, Germany, Belarus and Brazil.
A single company, Potash Corp, currently holds 38 per cent of global productive capacity.
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Since July, 2007 the US$ price for Muriate of Potash (MOP) has increased from US$189 to US$403 per tonne.
Refer to Figure 7 to show the movement in the price of MOP since mid-2004.
Figure 7: Muriate of Potash Prices per US$ per Tonne, Vancouver.
Source: Confidential
The rapid recent increases in the potassium prices has been driven by the same factors as for phosphate, notably:
� Increased areas of land planted to grain due to recent increases in soft commodity pricing including in
particular wheat; and
� Enormous increases in the areas planted to bio-fuel crops.
During the period July 2007 to March 2008 the exchange rate has moved only fractionally so the full effect of the
price increases have flowed from fertiliser manufacturer / reseller through to Growers. Growers are expected to
pay even higher prices in the short term for potash based fertilisers.
Potassium prices are not however expected to go back to levels of say five years ago unless there are significant
new minable resources identified.
2.5 Crop Protection Chemicals
2.5.1 PRICES FOR CROP PROTECTION CHEMICALS
The majority of chemicals utilised in horticulture in Australia are imported or the raw materials involved in their
production are produced overseas. Australia represents only three per cent of worldwide demand for agricultural
chemicals and so is generally regarded as a price-taker on the world stage.
As a consequence the majority of chemicals are internationally priced, based on the international supply and
demand for the product and / or its components.
For example, the most used herbicide in horticulture, glyphosate, has increased in price since 2005 from around
A$4.50-$5.00 per litre (retail sales price) to a current price of A$13.00-$13.50 per litre. The key drivers to this
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price increase of 160-200 per cent have been:
� Decreased supply from China, the principle production source, as the Chinese government removes
large numbers of ‘backyard’ / smaller operators. This situation applies to both the production of
glyphosate and its key ingredient glycine acid.
� Increased demand from glyphosate-ready crops particularly in the USA, Canada and South America.
� Increased worldwide grain production driving increased demand.
So severe is the current worldwide shortage for glyphosate that even major Australian suppliers are having to pay
for the product on ordering.
Industry observers suggest that in the short term there are limited prospects for the prices to be reduced.
Another chemical in wide use in horticulture, copper based fungicides, have in the last two years increased from
A$3.50 to around A$7.00 per kilogram. Copper fungicide prices directly follow the movements in international
metal prices. Other elemental fungicides such as manganese and zinc also track the commodity price.
As discussed previously the majority of farm chemicals (and fertilisers) are traded in US$. Since January 1, 2007
the Australian dollar has appreciated against the US dollar by 20.3 per cent. This appreciation has negated the
full flow on effects of price increases in a wide range of chemicals (and fertilisers). Any significant depreciation of
the Australian dollar against the US dollar will result in even greater price increases to input suppliers and
ultimately Growers.
2.5.2 RURAL MERCHANDISERS
In Australia, there are two national rural merchandisers, Landmark and Elders. Further, there exist a number of
smaller operators who either act as buying groups e.g. CRT and NRI or other collectives such as IHD. Overall the
competitive market environment is regarded as being highly competitive. The market environment in recent times
has been particularly competitive as the drought has reduced overall sales volumes. One industry source
suggested that as the seasonal conditions tend to improve, rural merchandisers may seek to extract small
increases in margins, therefore increasing the prices paid by Growers.
As discussed previously, rural merchandisers, particularly in respect of chemicals and fertilisers which are ‘traded’
internationally, are price takers. As a consequence they are generally ‘cost plus’ businesses who have to compete
for business heavily based on price and servicing.
The same industry source suggested that the majority of rural merchandisers will seek to achieve a storewide
gross margin of around 15 per cent. Target gross margins have increased over time as rural merchandisers have
had to employ more staff in the role of agronomists and similar as government agencies reduce their investment in
this area.
Due to the highly competitive market environment for chemicals and fertilisers, larger Growers are able to
negotiate better prices for the majority of their inputs. Conversely, the significance of these negotiated benefits are
not large in the overall perspective of the operation of a farm due to the low margins existing in the industry.
2.6 Water & Irrigation
Both the cost and availability of water have had a significant impact on the financial performance of individual
horticultural enterprises across Australia. The impact does vary depending on the farms locations.
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The impact of the drought has been felt greatest in the Murray-Darling irrigation areas. In 2005, the average price
paid for temporary or annual water allocation range from $50-$90 per megalitre. The price in 2007 fluctuated from
$800-$1,200 per megalitre and is now currently around $350 per megalitre (end of summer). Permanent water
licences have increased in this three year period from around $1,200-$2,400 per megalitre. By their very nature,
temporary water prices will always vary more widely than prices for permanent licences due to the impact on
short-term supply and demand. For instance, currently irrigators in the Lower Murray-Goulburn are only able to
access 43 per cent of their entitlement (in the Goulburn, this figure is presently 55 per cent and in South Australia
32 per cent and NSW 25 per cent) and therefore the demand for temporary water is greater than if those
allocations were closer to 100 per cent. Further, as the season approaches winter (when the majority of rainfall is
generally received) and water usage decreases, the price generally decreases.
Irrigation allocations for the Murray-Darling may change monthly and so therefore growers must manage their
allocations carefully. Allocation percentages vary greatly depending on the outcome of rainfall events. For
instance, forecasts suggest that provided the Lower Murray and Goulburn catchments receive average rainfall
during the coming autumn-winter period, the forecast allocation will be 63 per cent and 82 per cent respectively by
October 2008 and increasing to 100 per cent by February 2009..
Uncertainty regarding available water allocations may have the following impacts on producers in these regions:
1. Growers may plant a area of crops than they may have otherwise, which has the impact of increasing
per unit overhead costs.
2. Growers focussing on higher return crops at the expense of those that provide a lower return per unit.
3. Growers who grow tree or vine crops either deciding to abandon or only apply maintenance levels of
irrigation. In the latter instance, this directly impacts on the total harvest volume.
An example of how irrigation shortages and increased purchase costs for temporary water impact on the costs of
production of horticultural crops is presented in Table 5. The figures present a case which calculates the
additional revenue that the grower must receive per tonne of citrus to justify the investment in temporary water
purchases. Further, the case study also demonstrates the importance that irrigation water costs have on the
variable cost of production of a tonne of citrus.
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Table 5: Breakeven Analysis Example for Application of Irrigation to Valencia Oranges (Per Ha).
Item Quantum Unit
Assume: Average Irrigation use per annum 8.00 megalitres
Assume: Percentage of entitlement available 45 %
Irrigation Available from allocation 3.60 megalitres
Additional Irrigation to Purchase 4.40 megalitres
Assume: Purchase Cost for Temporary Water $1,200 per megalitre
Total Purchase of Temporary Water $5,280 per Hectare
Assume: Valencia Volume Harvested 50 tonnes
Additional Revenue per tonne of Valencias to achieve breakeven $105.60 per tonne
Assume: Total costs of production per hectare for Valencia crop (excluding
purchase of temporary water and harvest costs)
$5,000 per Hectare
Total costs of production per hectare for Valencia crop (including purchase of
temporary water but excluding harvest costs)
$10,280 per Hectare
% Change in production costs per hectare with purchase of temporary water 105.6%
Source: Confidential, CDI Pinnacle Management
This example demonstrates that with the purchase of temporary water the costs of production per hectare have
more than doubled (if we ignore harvest costs).
Further, a Grower firstly needs to assess whether the return they may receive is greater than the $105.60 per
tonne they will have had to spend on irrigation water and that the risk of doing so is acceptable. Secondly, a
Grower would need to have the funds available to pay for the additional water, which in the case of many Valencia
orange growers in the Murray-Goulburn may not be the case.
The price paid by Processors (predominately) for Valencias is directly dependant on both the supply of Valencias
in Australia (particularly for fresh) and the Brazilian Frozen Concentrated Orange Juice (FCOJ) price. If the
Valencia crop received rain, the irrigation water seasonal allocation would be expected to be larger and so the
Grower may lose money on their ‘investment’ in the temporary water. Similarly, if the FCOJ price dropped
dramatically the same could have occurred.
In Western Australia the vast majority of horticultural land is irrigated via bores and underground aquifers. Water
is not tradeable as the water asset is tied to the land parcel. Water charges are currently in the range of $45 per
megalitre with minimal change beyond consumer price index increases.
In Queensland, the situation with regards to irrigation water varies from region to region. In the Lockyer Valley
irrigation for horticultural crops has not been gazetted. Therefore, provided supplies are available Growers are
permitted to access the water in any volume. The issue in that region is that in recent times due to drought
Growers have not had unfettered access to irrigation water. This has had an impact on the supply of salad
vegetables in particular during winter across Australia. In the Wide Bay (which includes Bundaberg) both
groundwater and bore water use is regulated. Growers are able to purchase allocation (medium priority) for
approximately $1,000 per megalitre. Growers are also permitted to purchase temporary allocations from other
Growers, under similar arrangements to what occurs in the Murray-Darling system. Temporary water prices vary
considerably depending on seasonal conditions. Current prices are now less than $200 per megalitre although in
January, 2008 prior to the seasonal break the price was over $400 per megalitre.
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Similar to Bundaberg, the Bowen, Burdekin and Atherton Tableland districts are subject to regulation (bore and /
or groundwater). Growers in the Burdekin have always been permitted full access to their groundwater quotas.
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3. Fruit & Vegetable COP
Analysis
Within the production side of horticulture there is a distinct lack of recent and objectively collected information
pertaining to the Costs of Production (COP) for the very diverse range of fruit and vegetables produced in
Australia. No national benchmarking analysis is undertaken in Australia.
Further complicating the analysis of data are factors such as the variation in business size, impact of
environmental factors and data collection mechanisms employed by Growers.
Section 3 will provide COP on a narrow range of crops, as well as provide discussion on the factors that are
contributing to rising COP, changes in average revenues and the ability / inability of growers to ‘pass on’ cost
increases.
3.1 Leafy Vegetables – Eastern Australia (1)
This Grower case study involves a business with an annual turnover of $2.5-5.0 million per annum.
Please note in this example the Growers chemical and packaging costs are included under Other Crop and
Management Costs. The breakdown of costs for this operator for the two years 2005 and 2007 are presented in
Table 6.
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Table 6: Production Cost Structure – Medium Sized Farm – Leafy Vegetables.
Cost Item 2005
%
2007
%
Fuel & Oil 1.5 1.7
Seedlings / Seed etc. 14.7 17.0
Fertiliser (solid & liquid) 11.3 8.0
Labour (crop establishment, harvesting, packing), include all
costs eg. Superannuation, Workers Compensation
36.1 40.0
Other Planting Materials (plastic etc) - -
Chemicals (pesticides, fungicides, wetters etc) - -
Irrigation – Annual Consumables (tape etc) 3.6 4.5
Irrigation – Water Purchasing / Leasing 0.1 0.1
Packaging (cartons, liners, tape etc) - -
Other Packing - -
Transport (outward) 11.8 12.1
Other Crop & Management Costs eg. Chemicals, Insurance,
Packaging and Ffinance costs
18.7 14.7
All Other Costs 2.2 1.9
Total Cost as % of Total Costs 100.0 100.0
Source: Confidential
This Grower respondent made the following comments in regards to the variation in costs and returns associated
with their business.
1. Both 2005 and 2007 crop years were lower than normal due to reduced availability of irrigation water.
2. In particular, water supply availability dropped from 25 per cent to 15 per cent.
3. In 2007, this Grower received the highest yearly average price in over two decades of farming. These
price levels were achieved only due to the drought which occurred in all leafy vegetable production
districts at that time. The lower volumes on offer resulted in the higher prices. By careful management
of the irrigation resources this Grower produced significantly less crop volume, however profitability was
significantly enhanced between 2007 and 2005 (Grower declined to share revenue figures).
4. Whilst the average prices received were higher through sales to MSC, the Central Markets in times of
extreme shortness of supply may have higher average prices. Conversely, in periods of oversupply the
Central Markets generally pay prices lower on average. This Grower commented there generally was
little benefit to them of the higher Central Market price because that generally coincides with when they
have no or limited product to offer.
5. In the period 2005 and 2007 the return per kilogram for lettuce sold to a processor had increased by 2
cents. Over the same timeframe costs had increased by 6 cents.
6. Due to the increasing costs of production, the levels of Working Capital needed to be increased by 25
per cent. This adds further to annual interest payments.
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In general, this Grower believes that the greatest contributor to changes in cost and returns per unit for Growers
were extreme variations due to seasonal conditions e.g. Drought, flood and temperature (hot and cold). Their
perception was that these variations were greater than would normally be experienced.
The analysis of this business shows that the top four cost categories in 2007 were Wages (40.0 per cent),
Seedlings / Seed (17.0 per cent), Other Crop & Management Costs (which includes chemicals and packaging)
(14.7 per cent) and Transport (12.1 per cent).
An estimated breakdown of the next party in the chain who handled this Growers produce is provided in Table 7.
Table 7: Estimated Volumes of Product Handled by Next Business in the Chain.
Item 2005
%
2007
%
% Direct to Supermarket 30 -
% To Supermarkets via Consolidator 30 60
% To Wholesalers 15 15
% To Export / Exporters - -
% Direct to Processors 25 25
Source: Confidential
The Grower commented that their business strategy involved maximising the volume of product to MSC either
directly or via Consolidators as the average return they have received historically is superior to that received from
Wholesalers. Whilst the margins received from Processors is declining in absolute terms the fact that the Grower
is able to ‘lock in’ a price and volume provides a level of certainty of sales turnover which underpins the business.
Security of return in terms of projected sales volumes and higher average returns are the two governing factors
behind the business strategy of this Grower.
3.2 Leafy Vegetables – Eastern Australia (2)
This Grower case study involves a business with an annual turnover of $2.5-5.0 million per annum.
The breakdown of costs for this operator for the two years 2005 and 2007 are presented in Table 8.
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Table 8: Production Cost Structures – Medium Sized Farm – Leafy Vegetables.
Cost Item 2005
%
2007
%
Fuel & Oil 3.8 4.1
Seedlings / Seed etc. 2.1 2.7
Fertiliser (solid & liquid) 2.9 3.0
Labour (crop establishment, harvesting, packing), include all
costs eg. Superannuation, Workers Compensation
44.6 39.6
Other Planting Materials (plastic etc) - -
Chemicals (pesticides, fungicides, wetters etc) 4.0 4.0
Irrigation – Annual Consumables (tape etc) 1.7 1.3
Irrigation – Water Purchasing / Leasing - -
Packaging (cartons, liners, tape etc) 20.4 23.4
Other Packing - -
Transport (outward) 7.2 7.7
Repairs & Maintenance 4.3 6.0
Electricity 2.9 2.5
All Other Costs 6.1 5.7
Total Cost as % of Total Costs 100.0 100.0
Source: Confidential
The four major cost centres for the business in order of importance (based on 2007 prices) are Labour (39.6 per
cent), Packaging (23.4 per cent), Transport (7.7 per cent) and Repairs & Maintenance (6.0 per cent). The total of
these four cost centres is 76.7 per cent.
Total sales revenues for this business in the period 2005 increased by 39.9 per cent although costs increased by a
smaller amount of 14.4 per cent. It must be noted that the 2005 year showed a loss on sales revenue of 6.1 per
cent. The single greatest factor contributing to the turnaround were the impacts of the drought in local and nearby
regions where Growers had limited access to water resources. This Grower had access to irrigation water through
past initiatives and so was able to benefit from it.
The Gross Profit percentage was calculated at 13.3 per cent of sales.
This Grower maintains a strong commitment to the supply of their produce to the Central Market. Their philosophy
is that others in the chain have skills in marketing that they do not possess and so are prepared to pay / accept the
fees that they charge for the provision of this service. The marketing channels supplied and estimated volumes
are presented in Table 9.
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Table 9: Estimated Volumes of Product Handled by Next Business in the Chain.
Item 2005
%
2007
%
% Direct to Supermarket - -
% To Supermarkets via Consolidator - -
% To Wholesalers 90 90
% To Export / Exporters - -
% Direct to Processors 10 10
Source: Confidential
3.3 Strawberries and Mangoes – Eastern
Australia
This Grower case study involves a business producing strawberries and mangoes.
The breakdown of costs for this Grower in the production of strawberries in 2005 and 2007 is presented in Table
10.
Table 10: Production Cost Structure – Large Sized Farm – Strawberries, 2005 and 2007.
Cost Item 2005
%
2007
%
Fuel & Oil
Seedlings / Seed etc. 7.8 6.9
Fertiliser (solid & liquid) 2.0 2.0
Labour (crop establishment, harvesting, packing), include all
costs e.g. Superannuation, Workers Compensation
47.3 48.8
Other Planting Materials (plastic etc) 3.2 3.4
Chemicals (pesticides, fungicides, wetters etc) 2.2 2.3
Irrigation – Annual Consumables (tape etc)
Irrigation – Water Purchasing / Leasing
Packaging (cartons, liners, tape etc) 13.2 12.1
Other Packing
Transport (outward) 1.6 1.6
All Other Variable Costs 22.7 23.0
Total Cost as % of Total Costs 100.0 100.0
Source: Confidential
Total COP has increased by 69 cents per kilogram between 2005 and 2007, or 14 per cent. Between 2005 and
2007 sales revenue increased by 67 cents per kilogram. The primary reason given by the Grower for the
increased price were adverse weather conditions impacting the total volume of strawberries that were sold in the
market. COP increases were due principally to increases in labour costs (41 cents per kilogram), although each
of the cost centres had small increases.
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The marketing channels supplied and estimated volumes are presented in Table 11.
Table 11: Estimated Volumes of Product Handled by Next Business in the Chain.
Item 2005
%
2007
%
% Direct to Supermarket 70 82
% To Supermarkets via Consolidator - -
% To Wholesalers 23 11
% To Export / Exporters 1 1
% Direct to Processors 6 6
Source: Confidential
This Grower has been a committed programmed supplier to one of the major MSC over a number of years. The
percentage of their business with the MSC has increased due to a better matching of supply with sales demand
from that MSC. This Grower supplies limited volumes by comparison to the Wholesale market, generally as an
overflow from MSC orders.
In respect of mango production, the breakdown of costs for this Grower in 2005 and 2007 are presented in Table
12.
Table 12: Production Cost Structure – Medium Sized Farm – Mangoes, 2005 and 2007.
Cost Item 2005
%
2007
%
Fuel & Oil - -
Seedlings / Seed etc. - -
Fertiliser (solid & liquid) 6.6 7.2
Labour (crop establishment, harvesting, packing), include all
costs e.g. Superannuation, Workers Compensation
42.7 40.2
Other Planting Materials (plastic etc) - -
Chemicals (pesticides, fungicides, wetters etc) 4.7 5.1
Irrigation – Annual Consumables (tape etc) - -
Irrigation – Water Purchasing / Leasing - -
Packaging (cartons, liners, tape etc) 12.3 11.0
Other Packing - -
Transport (outward) 6.6 6.4
All Other Variable Costs 27.0 30.1
Total Cost as % of Total Costs 100.0 100.0
Source: Confidential
COP data for this data may indicate higher than industry standard costs as the orchards owned by the Grower are
not fully mature and so have a higher proportion of non-productive costs e.g. fertiliser and maintenance labour.
An estimated breakdown of the next party in the chain who handles this Growers mangoes is provided in Table 13.
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Table 13: Estimated Volumes of Product Handled by Next Business in the Chain.
Item 2005
%
2007
%
% Direct to Supermarket 40 40
% To Supermarkets via Consolidator - -
% To Wholesalers 47 47
% To Export / Exporters 11 11
% Direct to Processors 2 3
Source: Confidential
This Grower has not increased the proportion of business done with the MSC because as a producer of a
premium quality product, the Grower believes that the Central Markets is prepared to pay a higher price for the
product they produce. That said, the Grower did comment that it was only one MSC that was not prepared to pay
the premium price demanded.
Detailed analysis suggests that returns for mangoes sold to MSC were 31 per cent higher (select sizes) and for
strawberries 18 per cent higher than the average returns from Wholesalers in 2007.
3.4 Tropical Fruit – Eastern Australia
This Grower case study involves a business with an annual turnover of $0.5-1.0 million per annum.
The breakdown of costs for this operator for the two years 2005 and 2007 are presented in Table 14.
Table 14: Production Cost Structures – Medium Sized Farm – Tropical Fruits.
Cost Item 2005
%
2007
%
Fuel & Oil 3.9 3.2
Seedlings / Seed etc. - -
Fertiliser (solid & liquid) 5.9 4.0
Labour (crop establishment, harvesting, packing), include all
costs e.g. Superannuation, Workers Compensation
39.2 37.1
Other Planting Materials (plastic etc) - -
Chemicals (pesticides, fungicides, wetters etc) 4.9 4.0
Irrigation – Annual Consumables (tape etc) - -
Irrigation – Water Purchasing / Leasing 4.9 2.4
Packaging (cartons, liners, tape etc) 17.6 15.3
Other Packing 1.0 9.7
Transport (outward) 11.8 16.1
All Other Variable Costs 10.8 8.1
Total Cost as % of Total Costs 100.0 100.0
Source: Confidential
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This Grower respondent made the following comments in regards to the variation in costs and returns associated
with their business.
1. Overall on-farm costs increased by 21.6 per cent. Overall costs including marketing commissions and
fixed costs increased by 23.9 per cent.
2. Labour, packaging and transport accounted for 68.5 per cent of production costs in 2007. If we include
all costs except taxation ie. fixed costs and marketing charges, these three cost centres still represent
48.3 per cent of costs. If we add commissions and levies for the four cost centres (labour, packaging,
transport, commissions and levies) they account for 63.6 per cent of all production costs.
3. For the same period net profit (after deductions for fixed costs including interest but not taxation) rose
from 0.7 per cent of sales to 15.3 per cent of sales. The increase in net profit was due to greater
volumes of PBR protected varieties being sold direct to MSC by a consolidator. Despite this costs still
increased at a faster rate than sales.
4. Commissions and levies increased from 11.8 to 15.8 per cent of total sales.
5. The major cost increases per kilogram of product sold were transport (8 cents per kg or 67 per cent),
other packing costs (11 cents per kg) and labour (6 cents per kg or 15 per cent). Transport costs
increased due to the increased price of diesel and fuel levies imposed by transport companies. This
business being located in North Queensland already has a comparatively high per unit cost for transport
due to the distance to major southern markets. Despite the introduction of labour saving practices
labour costs still increased by 15 per cent due to the higher labour rates that must be paid due to
increases in award payments and the competitiveness of sourcing labour willing to work.
6. During this period the operator was able to either lower or keep constant virtually all other major on-farm
costs on a per kilogram basis. This was achieved through the adoption of new / more advanced
irrigation and fertilising techniques, harvesting processes and greater packing automation.
This is a representative example of a medium sized business that, despite investing significantly in technologies to
lower costs, reduce usage of farm inputs and to grow products more desired by the marketplace (PBR varieties),
the cost increases are still greater than the increase in revenues that are received. This business commented that
if they were growing ‘more traditional’ varieties their long term viability may be placed into question.
The Grower commented that their business strategy involved maximising the volume of product sold via their
Consolidator as the average return that they have received is superior to that received from Wholesalers. This
Grower also commented that they received feedback from Wholesalers that their product was sold to one or both
MSC, although this Grower was sceptical that this was the case. Processing of this product results from the
product being unsuitable for the fresh market. Processing sales whilst contributing to the bottom line is regarded
as a by-product or salvage activity.
Estimates on the relative percentage shares that each of the major channels have of this Growers produce is
shown in Table 15.
Horticulture Australia Ltd ACCC Submission
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Table 15: Estimated Volumes of Product Handled by Next Business in the Chain.
Item 2005
%
2007
%
% Direct to Supermarket - -
% To Supermarkets via Consolidator 1 28
% To Wholesalers 70 52
% To Export / Exporters 5 -
% Direct to Processors 24 20
Source: Confidential
3.5 Macadamia Nuts – Eastern Australia
The macadamia nut industry in Australia has a different supply chain to that evident in the fruit and vegetable
industry. Firstly, macadamia nuts are not sold through Central Markets in any volume. Rather the industry
comprises a series of 12 processors in Australia who then process and market macadamias, through a series of
brokers located in both overseas and domestic markets. Other processors sell macadamias direct to MSC here in
Australia generally after value adding (salting, roasting, chocolate coating etc), or again via a series of Brokers
who then supply the MSC.
Whilst Australia is the leading producer in the world, macadamias are regarded as a commodity which is traded
around the world. Macadamia nuts compete with other shelf-stable nuts for market share in some markets, such
as snack foods. Prices paid for Nut-in-Shell (NIS) and processed macadamias are directly reliant on relative
levels of supply and demand. There is also a strong speculative element associated with macadamias which
industry observers believe contributes significantly to price variability at each level of the market.
Growers are not able to influence the price that they receive for their NIS beyond producing and supplying the best
quality NIS that they can.
A benchmarking program conducted by O’Hare et al (2008) confirmed that there is significant variability between
different sized macadamia enterprises and their location. That said labour and fertiliser remained the two greatest
input costs for macadamia farms. Fertiliser costs for macadamias represent a far greater percentage of total costs
than in any other sector of horticulture examined in the writing of this submission.
The costs associated with macadamia production for orchards greater than 35 hectares in size for two different
age ranges is presented in Table 16.
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Table 16: Percentage Costs on Major Inputs for Macadamia Production of Farms Greater than 35 ha in
size, 2004-2006.
Cost Item 2004-2006(1)
%
2004-2006(2)
%
Fuel & Oil 5.8 4.2
Seedlings / Seed etc. - -
Fertiliser (solid & liquid) 10.8 12.3
Labour (crop establishment, harvesting, packing), include all
costs eg. Superannuation, Workers Compensation
32.3 32.4
Management Costs 12.4 8.7
Other Planting Materials (plastic etc) - -
Chemicals (pesticides, fungicides, wetters etc) 3.3 4.9
Irrigation – Annual Consumables (tape etc) 1.1 2.4
Irrigation – Water Purchasing / Leasing - -
Packaging (cartons, liners, tape etc) - -
Other Packing - -
Transport (outward) 2.7 1.9
Repairs & Maintenance 8.6 9.5
Electricity 0.6 1.6
Finance Costs 9.1 4.0
Contractors (Harvesting) 0.9 9.9
All Other Variable Costs 12.2 8.2
Total Cost as % of Total Costs 100.0 100.0
Source: O’Hare et al, 2008.
(1) Trees between 6 and 10 years but farms greater than 35 hectares
(2) Trees > 10 years of age but farms greater than 35 hectares
The analysis conducted by O’Hare et al shows that over the period of 2003 to 2006 the profit before tax (PBT) for
all macadamia businesses were positive with the exception of the smallest businesses with young trees. The
financial performance figures are demonstrated in Table 17 and Table 18. The analysis was conducted on a total
of 41 farms.
Table 17: Summary of Financial Performance of Macadamia Farms between 6 and 10 years of age, 2003-
2006.
Farm Size Revenue per
Ha
Expenses per
Ha
Profit per Ha $ per kg NIS Average Yield
(t/ha)
<15 ha $5,087 $5,341 -$254 $3.22 1.58
>15 ha but <35
ha
$5,654 $4,164 $1,490 $3.40 1.66
>35 ha $7,268 $3,759 $3,509 $4.11 1.77
Source: O’Hare et al, 2008.
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Table 18: Summary of Financial Performance of Macadamia Farms Greater Than 10 years of Age, 2003-
2006.
Farm Size Revenue per
Ha
Expenses per
Ha
Profit per Ha $ per kg NIS Average Yield
(t/ha)
<15 ha $9,289 $5,574 $3,714 $2.99 3.11
>15 ha but <35
ha
$10,647 $5,931 $4,716 $2.93 3.64
>35 ha $11,193 $5,948 $5,245 $3.03 3.69
Source: O’Hare et al, 2008.
What is not captured in the figures presented are that macadamias are a long lead time crop with crops not being
harvested generally until four to five years of age, although these crops are generally quite small. Any movement
in input costs, in particular labour and fertiliser, impact greatly on the long term viability of macadamia orchard
establishment.
We believe this assertion would hold true for any tree crop that has multiple years until the first significant crops
are harvested.
A prime example of macadamia industry growers (and we believe anecdotally almonds and hazelnuts) being price
takers and not being able to influence prices is demonstrated by the average NIS prices paid in the last two years
as shown in Table 19.
Table 19: Australian Macadamia Harvest Volumes and Average NIS Prices Received by Growers, 1995 to
2007.
Year Australian NIS Harvest (tonnes) Farmgate NIS Price ($/kg)
1995 17,000 $3.00
1996 19,000 $3.05
1997 21,133 $2.70
1998 24,133 $2.45
1999 28,300 $2.25
2000 29,667 $2.12
2001 32,433 $2.45
2002 31,500 $2.75
2003 31,567 $3.20
2004 34,600 $3.45
2005 36,233 $3.65
2006 40,500 $2.70
2007 38,800 $1.60
Source: Australian Macadamia Society.
At the 2007 price of $1.60 per kg NIS no matter what size the property Growers in this year made a PBT loss.
Horticulture Australia Ltd ACCC Submission
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3.6 Citrus Industry – South-Eastern Australia
Research was conducted by RMCG in the Sunraysia and Riverina Districts on 31 citrus farms who provided
detailed COP data associated with their business operations, for F2004, F2005 and F2006.
A summary of the financial results for these farms is provided in Table 20.
Table 20: Average Financial Performance of Citrus Farms in the Riverina & Sunraysia Districts, 2004 to
2006.
Cost Item F2004
%
F2005
%
F2006
%
Fuel & Oil 2.8 3.1 3.4
Seedlings / Seed etc.
Fertiliser (solid & liquid) 5.1 6.6 5.4
Labour (crop establishment, harvesting, packing),
include all costs eg. Superannuation, Workers
Compensation)
30.4 33.4 40.1
*Owners Labour 24.7 21.2 16.7
Other Planting Materials (plastic etc)
Chemicals (pesticides, fungicides, wetters etc) 4.2 3.7 5.0
Irrigation – Annual Consumables (tape etc)
Irrigation – Water Purchasing / Leasing 6.1 5.6 5.3
Packaging (cartons, liners, tape etc)
Other Packing
Transport (outward)
Repairs & Maintenance 5.5 4.6 4.2
Electricity 3.2 3.2 3.0
All Other Costs (including freight & packaging) 17.6 18.4 17.0
Total Cost as % of Total Costs 100.0 100.0 100.0
Source: RMCG, March 2008.
* Not Included in Other Analysis
Again, as for nearly all farming enterprises in this submission the principal cost centres revolve around labour (and
in this study owners’ labour), packaging and transport, irrigation and fertilisers.
A financial analysis presented in Table 21 demonstrates that if Growers exclude the cost of their own labour, whilst
the EBITDA results remain positive, the total funds available to service capital and costs of finance have declined
dramatically from $3,151 to just $355 per hectare. By taking into consideration the Growers own labour costs
EBITDA’s are negative for two out of three years.
Horticulture Australia Ltd ACCC Submission
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Table 21: Summary Financial Position of Citrus Farmers in the Riverina & Sunraysia, F2004 to F2006.
Item F2004
$
F2005
$
F2006
$
Citrus Income 9,136 7,619 6,742
Less: Total Operating Costs (excluding Owners
Labour)
5,985 6,825 6,407
EBITDA (excluding Owners Labour) 3,151 794 335
Less: Owners Labour 1,967 1,831 1,285
EBITDA (including Owners Labour) 1,184 -1,037 -950
Citrus Yield (tonnes per ha) 22 26 27
Source: RMCG, March 2008.
The analysis conducted by RMCG also evaluated the performance of the top and bottom 25th percentiles in the
study group for F2006. These figures are presented as Table 22. Please note the author requested that readers
should take care when comparing low and high groups as the averages can be misleading. They indicate that an
excessively high or low value may in fact distort the figures.
Table 22: Summary Financial Position of Citrus Farmers in the Riverina & Sunraysia, F2006 (Top and
Bottom 25th Percentile & Average).
Item Low 25th
Percentile
$
Average High 25th
Percentile
$
Citrus Income 4,549 6,742 9,365
Less: Total Operating Costs (excluding Owners
Labour)
4,626 6,407 8,127
EBITDA (excluding Owners Labour) -77 335 1,238
Citrus Yield (tonnes per ha) 21 27 33
Source: RMCG, March 2008.
3.7 Bananas– Northern Queensland (1)
This Grower case study involves a business with an annual turnover of $7.5-10.0 million per annum.
The breakdown of costs for this Grower in 2007 is presented in Table 23.
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Table 23: Production Cost Structures – Large Sized Farm – Bananas.
Cost Item 2007
%
Fuel & Oil 1.8
Seedlings / Seed etc. 0.3
Fertiliser (solid & liquid) 7.4
Labour (crop establishment, harvesting, packing), include all costs eg.
Superannuation, Workers Compensation
48.1
Other Planting Materials (plastic etc)
Chemicals (pesticides, fungicides, wetters etc) 4.1
Irrigation – Annual Consumables (tape etc) 1.1
Irrigation – Water Purchasing / Leasing
Packaging (cartons, liners, tape etc) 3.2
Other Packing
Transport (outward) 16.4
Repairs & Maintenance
Electricity
All Other Costs including Interest, Accountancy, Rates, Rent, R&M, Electricity
and Insurance (therefore includes overhead costs)
17.6
Total Cost as % of Total Costs 100.0
Source: Confidential
The three most significant costs in the operation of this banana farm are Labour (45.5 per cent), Transportation
(16.2 per cent) and Fertiliser costs (7.4 per cent), if we ignore the collective Other Costs which comprise multiple
smaller cost centres.
This Grower indicated that per unit costs were higher than normal in 2007 as the financial impacts of Cyclone
Larry resulted in lower average yields and higher costs associated with the establishment of new plantations.
Net Profit before Tax (NPT) was 8.7 per cent. This Grower did comment that 2007 was the first profitable year for
their enterprise for three years.
An estimated breakdown of the next party in the chain who handled this Growers produce is provided in Table 24.
Horticulture Australia Ltd ACCC Submission
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Table 24: Estimated Volumes of Product Handled by Next Business in the Chain.
Item 2005
%
2007
%
% Direct to Supermarket 50 80
% To Supermarkets via Consolidator - -
% To Wholesalers 50 20
% To Export / Exporters - -
% Direct to Processors - -
Source: Confidential
This Grower commented that the increase in sales volumes direct to MSC was not necessarily due to the fact that
they paid more, but rather due to the fact that the costs of doing business with them was lower than through the
Wholesaler network in the Central Markets. The return advantage of MSC over Wholesalers was approximately
10-15 per cent.
3.8 Bananas– Northern Queensland (2)
This Grower case study involves a business with an annual turnover of $2.5-5.0 million per annum.
The breakdown of costs for this Grower in 2007 is presented in Table 25.
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Table 25: Production Cost Structures – Medium Sized Farm – Bananas.
Cost Item 2005
%
2007
%
Fuel & Oil 1.7 2.6
Seedlings / Seed etc. - 0.4
Fertiliser (solid & liquid) 7.2 7.5
Labour (crop establishment, harvesting, packing), include all
costs eg. Superannuation, Workers Compensation
34.4 25.4
Other Planting Materials (plastic etc) 0.1 -
Chemicals (pesticides, fungicides, wetters etc) 0.1 6.6
Irrigation – Annual Consumables (tape etc) 3.1 0.9
Irrigation – Water Purchasing / Leasing - 0
Packaging (cartons, liners, tape etc) 20.0 18.8
Other Packing
Transport (outward) 28.2 23.8
Repairs & Maintenance
Electricity
All Other Costs including Land Rental, Leasing, R&M, Phone,
and Bank Interest
5.1 6.6
Total Cost as % of Total Costs 100.0 100.0
Source: Confidential
The three most significant costs in the operation of this banana farm in 2007 were Labour (25.4 per cent),
Transportation (23.8 per cent), Packaging (18.8 per cent) and Fertiliser costs (7.5 per cent), if we ignore the
collective Other Costs which comprise multiple smaller cost centres.
The average COP increased by 22.0 per cent between 2005 and 2007. The areas of greatest cost increase was
associated with Packaging and Chemicals.
The lack of time available did not permit HAL to discuss with this Grower the factors that contributed to the
reduced labour costs from 2007 to 2005.
This Grower indicated that per unit costs were higher than normal in 2007 as the financial impacts of Cyclone
Larry resulted in lower average yields and higher costs associated with the establishment of new plantations.
Average net sales returns were 37.6 per cent higher in 2007 when compared with 2005. Reduced supply caused
by Cyclone Larry was the major reason why returns were higher according to this Grower.
An estimated breakdown of the next party in the chain who handled this Growers produce is provided in Table 26.
Horticulture Australia Ltd ACCC Submission
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Table 26: Estimated Volumes of Product Handled by Next Business in the Chain.
Item 2005
%
2007
%
% Direct to Supermarket - -
% To Supermarkets via Consolidator 30 0
% To Wholesalers 70 100
% To Export / Exporters - -
% Direct to Processors - -
Source: Confidential
This Grower believes that whilst the MSC may on average be prepared to pay an extra $1-2 more per carton and
meet the ripening costs, the added costs of the Non-Grower Consolidator did not result in any farm gate benefit to
this Grower. As a consequence this Grower moved away from supplying the MSC Non-Grower Consolidator to
supplying only the Wholesale sector.
Further, this Grower had experienced situations where their green Bananas were rejected by one MSC. The
Grower then needed to place these bananas onto the Central Market and sell them at a considerable discount as
the buyers used this knowledge to ‘knockdown’ the price.
This Grower also commented that their belief was that the MSC had negotiated with larger Growers price
arrangements that included a maximum / minimum pricing formula. This Grower contends that in times of excess
supply that consumers do not benefit from the lower prices that are on offer in the general market place due to this
pricing formula. The late arrival of this Grower’s information did not permit HAL to investigate this claim further.
3.9 Pineapples– South-Eastern Queensland
This Grower case study involves a pineapple production business with an annual turnover of between $10 and
$15.0 million.
The breakdown of costs for this Grower in the production of pineapples in 2005 and 2007 is presented in Table 27:
Horticulture Australia Ltd ACCC Submission
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Table 27: Production Cost Structure – Large Sized Farm – Pineapples, 2005 and 2007.
Cost Item 2005
%
2007
%
Fuel & Oil - -
Seedlings / Seed etc. - -
Fertiliser (solid & liquid) 4.4 4.5
Labour (crop establishment, harvesting, packing), include all
costs e.g. Superannuation, Workers Compensation
42.3 44.5
Other Planting Materials (plastic etc) - -
Chemicals (pesticides, fungicides, wetters etc) 2.8 2.7
Irrigation – Annual Consumables (tape etc) - -
Irrigation – Water Purchasing / Leasing - -
Packaging (cartons, liners, tape etc) 13.3 13.6
Other Packing - -
Transport (outward) 17.8 17.3
All Other Variable Costs 19.4 17.3
Total Cost as % of Total Costs 100.0 100.0
Source: Confidential
For pineapples the production costs have increased 12.2 per cent from 2005 to 2007. Although the lack of rain in
the area has added marginally to costs, the cost increases are due simply to increases in costs of inputs.
EBIT per kilogram has decreased from 28 cents per kilogram to 21 cents per kilogram over the survey period,
even though gross returns per kilogram have has increased 5 cents per kilogram.
The market channels that this Grower supplies is presented in Table 28.
Table 28: Estimated Volumes of Product Handled by Next Business in the Chain.
Item 2005
%
2007
%
% Direct to Supermarket 54 72
% To Supermarkets via Consolidator - -
% To Wholesalers 32 14
% To Export / Exporters 2 1
% Direct to Processors 12 13
Source: Confidential
The principal reasons why this Grower is delivering increased volumes of pineapples direct to MSC reflects the
quality of the produce that is offered and the systems (communication, production etc) that the Grower is able to
offer the MSC. The Grower seeks to maximise the volumes of product sold direct to MSC. Sales returns are 31
per cent higher to MSC in comparison to Wholesalers.
Horticulture Australia Ltd ACCC Submission
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4. Grower Views on Alternative
Marketing Channels
4.1 Factors Influencing Grower Choice of
Marketing Channel
Growers consulted by HAL indicated a wide variety of channels to which they sold their produce (see Figure 1).
Some Growers marketed the vast majority of their produce to MSC, others sold no produce directly to a MSC
preferring to supply to the Wholesale markets or to Processors, whilst yet others supply a combination of market
channels. Factors which determine to whom Growers transact include:
1. Price Return. The major factor. Growers will typically seek to trade where they believe they are able to
achieve the highest price for their commodity.
2. History. Growers may chose a particular channel based on the fact that it is the channel that they have
supplied in the past and so will continue to do so.
3. Belief / Philosophy in the Central Market. Growers may believe that by supporting and maintaining the
strength of the Central Market that the forces of supply and demand act in a more perfect manner, rather
than have the ‘distortionary’ effects of market sales outside of the Central Market system.
4. Marketing Skills. A number of Growers contacted indicated that their skills lie in the production of
horticultural produce and not in its marketing. These Growers typically appoint Wholesalers to perform
this role on their behalf.
5. Risk Minimisation. Growers may choose to supply multiple channels in order to minimise or average the
risk associated with a particular market channel. Further, by doing so the Grower also believes that this
gives them greater market knowledge in negotiating with the various channels.
6. Volume Fit. Smaller growers who have no unique product or supply timing advantages and low product
volumes will typically not be able to access MSC as an Approved Supplier.
Certainly in respect of MSC there are limited number of ‘slots’ available for Growers / Suppliers to supply produce.
Both MSC have a stated policy that the number of Approved Suppliers will continue to decline over time. As
stated in the first submission this will result in either:
� More Growers becoming Network Growers on behalf of Consolidators who supply MSC; and / or,
� more Growers supplying produce to the Central Markets, if Grower Consolidators seek to increase their
own supply volumes to MSC.
Horticulture Australia Ltd ACCC Submission
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4.2 Doing Business with MSC
Only a proportion of all Growers do business direct with MSC. In the time associated with the preparation of this
submission it was not possible to determine the percentage of Growers who either directly or indirectly supply
produce to a MSC.
4.2.1 INCREASED COSTS OF BUSINESS WITH A MSC
Both MSC and non-MSC Suppliers raised a number of negative factors associated with ‘doing business’ with a
MSC. The majority of these factors are raised by comparing the costs of doing business with the Mid-Chain.
These are discussed in Table 29.
Table 29: Issues Raised by Suppliers on Additional Costs of “Doing Business” with MSC.
Factor Discussion
Packhouse Re-
Configuration
Packers who are required to supply RPC’s have in many instances had to meet
the additional costs of re-configuring their packhouse operation to enable this to
occur. This has / will result in additional capital expenditure.
Carton Stock Management Packers who are required to supply RPC’s must carry at least one additional stock
line.
Palletising MSC require suppliers to standardise pallet counts / no. of packs per pallet so as
to fit directly into their racking. As a consequence pallet usage is not maximised.
Different numbers of units per pallet provide additional management issues at
packhouse.
Transportation Lower counts per pallet demanded by MSC do not allow maximisation of volume
of pallet space therefore increasing per unit costs associated with transportation.
Transportation Suppliers are required to deliver direct to Distribution Centre (DC). Transporters
charge a premium for these deliveries as they are not able to backload out of the
distribution centre and unless they are Full Truck Loads (FTL) will then need to
deliver to another site/s.
Transportation Suppliers delivering to DC’s must meet specific time slots, have specific truck /
product temperatures and truck types. Failure to meet standards may result in
produce being rejected.
Carton Labelling Suppliers to MSC are required to print additional labelling information pertaining to
dates packed etc on the day of shipment. This may also require additional capital
expenditure.
Pallet Labelling As per “Carton Labelling”.
Consignment Rejection Suppliers to MSC may on occasion have their consignments rejected which is very
unlikely through the Central Markets. Product which is packed into RPC’s or One-
Touch Packaging may then have to be sold on the Central Markets often at a
considerable price markdown as the product is perceived by buyers as “Rejected”.
Further, the packaging type may not ‘fit’ with that of others. Also, a Supplier may
be required to re-pack the product at any additional expense to them.
RPC Stock Management Suppliers have an added responsibility for the orderly management of RPC stock
for which daily rental is charged if a Woolworths RPC. Loss of stock results in
added costs to the Supplier.
Horticulture Australia Ltd ACCC Submission
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Factor Discussion
Quality Systems Each MSC has a different QA system requirements for direct and indirect
suppliers.
Source: Various pers comm., CDI Pinnacle Management.
In general, views expressed by growers are that both MSC are seeking to increasingly move more costs of doing
business back down the chain to Growers, Wholesalers etc. This is reflected in respect of transportation of
produce to DC’s, stock management of RPC’s and introduction of traceability systems (product labelling /
tracking).
Sources suggest that the next focus of both MSC will be in the area of developing systems that provide for greater
adherence to quality specifications and more complex on-farm and in-packhouse quality assurance systems. This
will add further costs to the Grower Packer and Packhouse, neither cost of which will have any mechanism for the
Packer or Packhouse to re-coup.
4.2.2 RPC’S AND ONE-TOUCH PACKAGING
The most significant initiatives of the two MSC, that have impacted directly on Growers within the last three years,
has been the introduction of RPC’s by Coles Supermarkets in 2006 and One-Touch Packaging (OTP) and RPC’s
by Woolworths Supermarkets.
HAL’s first submission provides some general details on the introduction of RPC’s and OTP, although some
further discussion is warranted.
Growers were initially concerned about impacts on their business viability with the introduction of RPC and OTP.
However, both MSC have undertaken strategies to ameliorate these concerns as well as mitigate possible
concerns associated with third line forcing.
Both Coles and Woolworths contend that by moving to the RPC program that they have or are able to achieve (in
comparison with standard cardboard packaging):
� More rapid cooling of produce resulting in longer shelf life and better presentation to the customer;
� Low levels of in-transit damage to produce;
� Less damage in DC handling; and,
� Lower environmental impact due to their ability to recycle.
Suppliers do not directly benefit from the cost savings achieved from MSC moving to RPC’s. This is exacerbated
by having parallel systems that are not compatible, a further but avoidable burden on businesses that supply both
MSC.
Independent sources have however commented that with the introduction of the RPC program, both MSC have
had to develop better communication systems with Suppliers particularly in regards to product needs and
specifications, a situation obviously viewed positively by the supply end of the industry.
Coles Supermarkets
Coles Supermarkets operates its own ‘in-house’ RPC pooling system, with ownership of crate, washing and
logistics assets.
Horticulture Australia Ltd ACCC Submission
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For each new Supplier a Coles representative negotiates with them on the basis that the cost to the Supplier does
not increase in comparison with using traditional cardboard cartons. Factors that are taken into consideration
when determining the rate to be charged include:
� current cost of cardboard or other packaging materials;
� cost of collection of RPC’s;
� erection cost differences between RPC’s and traditional packaging;
� freight differences per unit between RPC’s and traditional packaging; and,
� capex costs associated with re-configuring packhouse layout and handling systems (these costs are
amortised).
RPC costs are fixed for a period of three years so as to provide ‘certainty’ to the Supplier in respect of packaging
costs to the MSC.
The Coles RPC program commenced operation in October, 2005 with a rollout on a product by product basis from
that date. Discussions with MSC Suppliers indicate that despite in some instances significant teething problems
the Coles RPC system is generally working well, although there are still some concerns with logistical issues in
high volume, short season crops and the need to switch between different pack types (where a Supplier is
supplying other customers).
Suppliers have hire fees deducted from remittances. Payment deductions occur 14 days after pick up of their
crates.
Woolworths
The Woolworths RPC program relies on an external source provider, Chep, to provide RPC’s to packhouses. HAL
understands the costs negotiated by Woolworths with CHEP were strongly linked to cardboard carton prices
available to packhouses at the time. Currently CHEP charges Packhouses an issue fee, daily hire fee and
additional charges if RPC’s are moved across state borders or zones within states. The rate does vary between
locations. A Packhouses ability to negotiate on RPC rates is dependant on the volume of existing business they
do with CHEP.
Currently, Woolworths do not insist that Packhouses pack their product in RPC’s. Our observations suggest
however that having the two systems that are currently in place can’t be continued for an extended period. Unless
there is a strong cost reduction incentive provided in switching to RPC’s, Growers are concerned that any added
costs of Woolworths RPC will further erode their profitability.
4.3 Chain Transparency Between Growers &
Other Chains Participants
There are distinct differences between how Growers ‘do business’ with MSC, Wholesalers and Processors. These
differences are discussed in Table 30. HAL wishes to acknowledge that these are general observations and do
not necessarily encompass all Grower and MSC, Wholesaler and Processor interactions.
Horticulture Australia Ltd ACCC Submission
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Table 30: Characteristics of Growers Ability to Negotiate on Prices Received and Cost Increases with Major Customer Groups.
Item MSC Wholesaler Processor
Price Setting Mechanism Central Market price used as the benchmark
pricing mechanism.
Central market pricing based on supply and
demand. The price balance largely determined by
volume / quality relationship of wholesalers and
their customers.
Fresh Food Processors: Price paid by processors
to Suppliers calculated on final end price that the
Processor can achieve for their product less a
margin. Reference however made to Central
Market price in order to identify cost
competitiveness.
Non-Fresh Processors: Typically base prices on
final end price they can achieve. Reference often
made also to price of imported raw ingredients.
Transparency of Price
Information
High. Supplier is aware prior to shipment of the
price to be received.
Variable. Supplier typically is not aware of price to
be paid prior to shipment, although indicative prices
may be indicated. Exception where fixed price deal
is agreed to prior to shipment. This type of
transaction forms only a small part of total
transactions to this segment of the chain.
High. Supplier is aware prior to shipment of the
price to be received and is usually aware well in
advance of harvest, and on occasion depending on
the crop before the production season commences.
A industry source suggests that up to 25 per cent
of transactions are based on fixed pricing
arrangements over extended time periods.
Ability to Pass on Cost
Increases
Fixed Price / Fixed Term Negotiations.
Comparatively high as price for product negotiated
is independent of the market price, although
reference is made to market prices as benchmark.
Weekly Agreed Price / Volume Negotiations. Low
as price is negotiated predominately on the basis of
market prices. If extremely high market prices,
Low. Comparatively low incidence levels of
Suppliers and Wholesalers negotiating and then
achieving price increases for products based on
cost increases. Market forces of supply and
demand are used as the price setting mechanism.
Growers generally indicate that they do not
perceive that the Central Markets is an area where
Higher comparatively. Price paid to Suppliers
typically a fixed price for a period of time, subject to
reviews. Suppliers who are able to demonstrate
cost increases may be able to pass on cost
increases, however this depends on the nature of
the commodity, the total number of actual or
potential suppliers, in some instances the import
replace ability of the product and the ability of the
Horticulture Australia Ltd ACCC Submission
50
Item MSC Wholesaler Processor
MSC may wish to negotiate a lower price.
Conversely, at low market prices, including below
of cost of production, the Supplier may be able to
negotiate some increase above market price.
cost increase negotiations can occur in a
meaningful way, based on tradition.
Supplier to differentiate their product in the eyes of
the Processor.
Suppliers and Processors may explore co-jointly
methods to lower supply costs. Processors have
been known to subsidise input costs (eg water
during drought) and make earlier payments to
Growers to assist with harvest costs / cash flow.
Supplier Awareness of
Quality Specification
Requirements
Very High. Suppliers are very aware of
expectations of MSC in terms of acceptable /
unacceptable quality parameters.
Variable but typically low but improving.
Wholesalers typically do not impose quality
standards on Suppliers. Wholesalers may
communicate quality issues to Suppliers, although
some Wholesalers see a risk that they may loose
the supplier, if complaints about quality supplied to
them are made too often. The absence of a
national quality standard for fruit and vegetables
seen by Wholesalers as a major weakness of their
ability to develop uniform quality standards. The
development of FreshSpecs by the Australian
Chamber may/will assist with this issue.
High to Very High. For fresh food processing
Suppliers are very aware of quality standards
required. Where products are to be supplied to
non-fresh market segments, whilst standards are in
existence the compliance may be variable.
Source: CDI Pinnacle Management, 2008.
Horticulture Australia Ltd ACCC Submission
51
5. Additional Information to
Submission One
5.1 ‘Combined Marketing’ and Horticultural
Code
The mandatory Horticultural Code of Conduct was executed on December 13th 2006 and became operational in
early 2007. The Trade Practices (Horticulture Code of Conduct) Regulations 2006 (HCOC) very specifically
applies to traders (agents and merchants) and Growers selling their produce to an agent or merchant.
An anomaly exists however in the HCOC whereby Network Growers through the provision of service providers
such as an Agent, Merchant or Non-Grower Consolidator, have their returns ‘averaged’ through a pooling
mechanism. Under the current definitions of the HCOC an Agent, Merchant or Non-Grower Consolidator would be
committing an offence under the HCOC, despite the fact that the Network Growers are in agreement that it should
occur.
For example, a group of Growers may decide to have their returns averaged by the Agent, Merchant or Non-
Grower Consolidator on the basis of a period of time (week, month or year), regional location, across a grade/s,
End User / Customer etc. The group of Growers may willingly enter into such an arrangement so that in-equities
or perception of same do not occur. By pooling, a marketer does not have to be concerned which Growers
product goes to which market . For instance, if an export market is being developed which has provides lower
returns initially, the marketer does not need to be concerned that all of Grower A’s product continues to go to
export, because with pooling they will receive some of the benefit of going to the higher priced markets through
averaging.
Pooling does not imply that packout is not a major factor in net return calculations or that the transaction is not
transparent.
Network Growers or other similar Grower groups have expressed concerned that the HCOC does not cover this
eventuality which is quite common across a broad range of fruit and vegetables.
5.2 Equivalence of Horticultural Product
HAL and the production sector have in the past expressed concern that the importation of some fruit and
vegetables currently permitted into Australia may present a risk to either human health or bio-security.
In the report entitled “Ensure Equivalence of Imported Product”, 2007, prepared by Food Compliance Australia Pty
Ltd on behalf of HAL, the report concluded
Horticulture Australia Ltd ACCC Submission
52
“it is likely that current administrative processes set up in the Imported Food Inspection Scheme do
assure the Australian community that all food imported into Australia complies with all requirements
of the Code”…..In principle, domestic producers must comply with all the requirements of food as
set out in the Code”.
HAL wishes to seek assistance from all parties that are involved in the importation of fruit and vegetables into
Australia that they seek to ensure that the processes applied to evaluation of the product in terms of the Code are
complied with and where necessary lobby government to ensure equivalence of the standards described in the
Code between imported and domestically produced fruit and vegetables.
Horticulture Australia Ltd ACCC Submission
53
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